Who can invest in a bonus depreciation fund?

Securities law decides who may buy, and most investors qualify through net worth or income

Rule 501(a) of Regulation D lists who is an accredited investor. For individuals the usual routes are net worth over $1,000,000, alone or jointly with a spouse or spousal equivalent, and income over $200,000 in each of the two most recent years, or $300,000 jointly, with a reasonable expectation of the same this year.

The net worth test excludes your primary residence as an asset, and mortgage debt on it up to its value is excluded as a liability. Debt added to the home in the 60 days before the purchase counts against you unless it was taken on to buy the home.

Rule 501(a)(10) adds holders of designated professional credentials. The SEC's investor bulletin names the Series 7, Series 65 and Series 82 licenses held in good standing.

The exemption the fund uses decides how you prove it

Under Rule 506(c) an issuer may advertise but must take reasonable steps to verify that every purchaser is accredited. The rule lists non-exclusive methods, including reviewing tax filings for the income test and obtaining written confirmation from a registered broker-dealer, adviser, attorney or CPA who verified status within the prior three months.

Under Rule 506(b) the issuer may not advertise, may sell to no more than 35 non-accredited purchasers in any 90 days, and each of them must have enough knowledge and experience to evaluate the investment, alone or with a purchaser representative.

Which route the fund took is public. Rule 503 requires an issuer relying on Rule 506 to file a Form D notice no later than 15 calendar days after the first sale, so you can look the offering up and ask which paragraph of Rule 506 it uses. If you are not accredited, the alternatives are in not accredited: 1031 replacement options, and the same rules applied to trusts are in DST accredited investor rules.

Tax rules decide who actually benefits

The fund's deduction is a passive loss for an investor who does not materially participate, and section 469 lets it offset only passive income. A salaried investor with no rentals and no rental sale has nothing for it to offset, as explained in whether a fund can offset W2 income.

The client describes its accelerated depreciation funds as designed for investors with significant passive income, capital gains or 1031 exchange needs. In tax terms that means rental profits, gain on selling a passive rental, or boot from an exchange that left some gain taxed.

How much of that gain the loss can cover depends on basis, at-risk and excess business loss limits as well; see how much of my gain a fund can offset.

Year-end timing matters more here than with almost any other investment

Section 168(k)(1)(A) allows the bonus deduction in the taxable year the property is placed in service. If the fund closes its purchase in January, a gain you realized in December is on a different return.

Admission date matters too. Section 706(d) requires a partnership to allocate the year's items using a method that accounts for partners' varying interests during the year, so a subscription signed after the property was placed in service may not share in that deduction. Ask the sponsor when the property will be placed in service and how losses are allocated to late admissions.

Subscription paperwork, accreditation checks and funding take time. Start in the autumn if the deduction is meant for this year's return.

Suitability is a separate test the selling firm must apply

A broker-dealer that recommends a fund must have a reasonable basis to believe it suits you. FINRA Rule 2111 lists the investment profile factors, including age, other investments, financial situation and needs, tax status, objectives, time horizon, liquidity needs and risk tolerance, and the rule says recommendations covered by Regulation Best Interest are governed by that rule instead.

Expect questions about how long you can leave the money untouched and what share of your net worth it represents. These funds are illiquid, often leveraged, can lose value, and give back their deductions as recapture when they sell, as covered in bonus depreciation recapture on sale.